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An amendment to the Corporate Law, proposed by the Legislative Council to Justice Minister Takashi Yamashita earlier this month, would impose a legal obligation for the first time on big companies to have an outside director on their executive board. Since nearly 98 percent of all firms listed on the Tokyo Stock Exchange already have at least one outside member on their board of directors, the measure has only a symbolic meaning — perhaps to show that Japan is making efforts to beef up corporate governance and build investor trust in companies’ management. However, just the presence of an outside director won’t prevent corporate scandals or wrongdoing from taking place. The question is whether such directors indeed play their intended role of providing independent management oversight.

Introduction of outside directors to Japanese boards gained momentum after the 2008 collapse of Lehman Brothers triggered the global financial crisis and recession. The Corporate Governance Code introduced by the TSE in 2015 to set a code of conduct for listed firms, meanwhile, called on listed companies to have at least two highly independent outside directors on their board to improve their management oversight. While the code is not binding, the firms that do not comply are urged to provide investors with a rational explanation why.

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